Hidden National Insurance rise will undermine gains from personal allowance rise to £50,000 for higher earners.
Higher earners with incomes approaching £50,000 have been dealt a backhanded blow by chancellor Philip Hammond in the Budget small print.
In yesterday’s Budget, he announced that the basic (20%) rate tax threshold will rise from £11,850 to £12,500 and the starting level for higher rate (40%) tax will increase from £46,350 to £50,000 in April 2018.
That should mean that people taking home between £46,350 and £50,000 will pay half as much income tax on that chunk of their earnings. For a £50,000 earner, that amounts to a tax cut worth £60.83 a month.
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However, Royal London trawled through the Budget small print and has highlighted the fact that the National Insurance contribution (NIC) limits have also moved in line with the change in the income tax threshold. As a consequence, higher earners are losing half their newfound tax gains on that marginal chunk of income.
At present, people earning more than £46,350 pay 12% NICs on earnings up to that level (the so-called upper earnings limit) but only 2% NICs on earnings above it. But from April next year they will pay the full 12% rate of NICs on everything up to £50,000, as the upper earnings limit is hiked up. The 2% rate will kick in on earnings above £50,000.
As a consequence, while tax payable on that slice will be reduced by 20%, NICs will go up by 10%, so the net gain is only 10%.
Alignment of the tax and NIC thresholds makes sense in terms of streamlining, but there was no mention of the NIC implications in the Budget speech.
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Steve Webb, director of policy at Royal London, comments: “The chancellor is well within his rights to increase the bands over which the full rate of NI contributions is payable.
“But as this wipes out half of the gain for higher earners of raising the starting point for higher rate income tax, he should have come clean and mentioned this in the Budget speech rather than leave it in the Budget small print.”
Steven Cameron, pensions director at Aegon, points out that it’s a worse situation for Scottish residents. “The Scottish government sets its own threshold for higher rate tax, which is currently £43,000. We will need to wait until the Scottish Budget on 12 December to see if they will unfreeze this. But the changes to National Insurance apply across the UK. This means someone in Scotland earning £50,000 will pay an extra £30.41 a month in NICs without saving anything in income tax.”
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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